Based on provisions of the 2005 Energy Policy Act, FERC established transmission rate incentives for developers of new transmission facilities.
FERC’s intent was to encourage certain kinds of transmission investment, with the objective of ensuring reliability, alleviating transmission congestion, and thus reducing the cost of electricity service. Among the incentives for which transmission developers are authorized to apply to FERC are: a rate of return on equity sufficient to attract new investment, recovery in rate base of 100 percent of prudent transmission related construction work in progress (CWIP), expensing (instead of capitalization) of pre-commercial operation costs, and recovery of the costs of transmission facilities that become abandoned (unnecessary) due to events beyond the transmission developer’s control.
Congress’ call for such transmission investment incentives can be found in EPAct Section 1241, which added Section 219 to the Federal Power Act of 1935.
The CPUC’s Position
The CPUC argued against an elevated return on equity. In addition, the CPUC argued in favor of more narrowly tailored set of investment incentives, as well as consideration of the total set of incentives relative to the risk of a particular investment (the “nexus test”), when assessing the appropriateness of any particular requested incentive. On rehearing, the FERC did accept this latter “total nexus” argument. In other words, if a utility’s risks for investment in a new transmission project were protected as its incentive to build the project, it should not be entitled to an elevated return on equity.